If you're wanting to grow your business or the cost of commercial space has gotten too expensive, you may consider investing in real estate. You're probably looking into commercial mortgage possibilities as a possible source of business finance, and you'll quickly realise that there's a lot to consider.
With a commercial mortgage, rent hikes will not be sudden or unexpected, but monthly repayments may increase if you have a variable rate arrangement. However, you may be able to obtain a fixed rate mortgage for a specified amount of time.
If the property's value improves, your business capital increases as well, and interest on a commercial mortgage is tax deductible. If your lender allows, you may be able to rent a piece of the premises to another business to help with the monthly payments
Payment options are similar to those available in the residential market, although interest rates are often slightly higher, as commercial mortgages are viewed as higher-risk. It is prudent to be able to mitigate this risk with a sizable deposit - at least 20%.
Additionally to the typical appraisal, arrangement, and legal expenses, a commercial mortgage may incur additional costs, therefore it's worthwhile to obtain clarity from a lender or broker.
There are a plethora of commercial mortgage providers available, ranging from major street banks to specialty lenders, so it's worth shopping around for one that ticks all your boxes - and at the correct price.
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Commercial Mortgage Loan Term
Typically, a loan term refers to the amount of time required to repay a loan in full through regular instalments, whether it's a commercial mortgage or another sort of business credit. A commercial mortgage loan normally has a period of three to twenty-five years.
However, the term 'commercial loan terms' can also refer to the specific conditions of the loan (for example, the interest rate you must pay) at the time of signing. These are the terms and conditions that you must follow and are also known as the loan's Terms and Conditions (T&Cs).
Approval of Mortgage
Your ability to obtain a commercial mortgage is contingent upon your business’s ability – in the lender’s opinion – to adhere to the loan’s repayment terms. To demonstrate this, you may be required to create a detailed business plan. Additionally, a professional appraisal will almost certainly be required prior to securing the business financing.
A commercial mortgage can be obtained via a high street bank, a challenger bank, or a specialty lender. If you choose a high street bank, you may need to relocate your business banking operations in order to obtain the best conditions. Certain specialty lenders offer interest-only commercial mortgages, as well as mortgages with a reduced down payment (although in these cases interest rates tend to be higher).
Commercial Mortgage Eligibility
When applying for a business mortgage, your trading history is critical. Lenders want to know that your firm can both afford and repay the mortgage. If you currently trade as a limited company, you must have at least three years of filed accounts to qualify for high-street banks and at least two years of filed accounts to qualify for challenger banks.
If you're considering purchasing a home in order to start a business, you'll need a sizable lump sum to invest. Typical loan-to-value ratios for a brand new business with no trading history will be no more than 50% of the purchase price, which means that to purchase a property worth £200,000, a down payment of at least £100,000 is required.
If your business already owns a large number of properties in the same region of the country, banks may find it difficult to grant you a new commercial mortgage since you've reached what they refer to as the 'concentration limit.' The notion is that if the market in that location declines, you would be far more vulnerable than you would be with a portfolio of homes distributed around the country.
When lenders issue commercial mortgages, they frequently want collateral – this helps to mitigate their risk when giving large mortgages for offices, warehouses, or other business properties. Adhering to guidelines helps alleviate some of the most frequently encountered buyer concerns.
Commercial Mortgage Interest Rates
Interest rates on commercial mortgages can be fixed in relation to either the base rate or the LIBOR (the rate at which banks lend to each other). Additionally, lenders will want a cash deposit or other form of collateral to assist mitigate risk.